Do you want to buy your bank a car

Why would you want to buy your bank a car, that’s just stupid?

You right, it is stupid. Yet millions of South Africans do it! And in fact a lot of people will buy their banks 3 or even 4 cars over their lifetime.

It seems to indicate that despite all the moaning and groaning, South Africans actually love their banks. A lot!

While this may sound ridiculous,  you will soon realise that it is not so far fetched after all. Let’s consider a hypothetical South African. We will call him Peter.

Peter starts his working career at age 20, and soon realises he needs a car. Of course since Peter has only just started working, he has no savings to speak of, and so his only real choice is to finance his first car. This is how many people (myself included) start their financial journey, and unless you are fortunate enough to have been given a car by your generous parents, there isn’t really any other choice.

Being at the bottom of the career ladder, and the matching pay to go with it, Peter is somewhat conservative with his approach, and he decides to get a R100k car. Nothing fancy, but a decent second hand option. He takes out a loan for 100% of the purchase price, and manages to get finance over 60 months at an above prime rate of 12%.

I am sure you agree, that this is a pretty average purchase – a monthly instalment of R2 224 and some change seems like a reasonable ask.

Time moves on, and Peter diligently makes his monthly payments. After 5 years his car debt has been fully settled. At the end of the 60 months, Peter would have paid a total of R133 467. In other words Peter would have paid around a third of the R100k purchase price over to the bank in the form of interest. While this is of course not ideal, Peter didn’t really have a choice and so I think he can be forgiven. The real problem is what most people do after this point. So let’s continue.

After the 5 years, Peter has climbed a few rungs up the corporate ladder, and now earns a slightly better paycheck. And of course he now no longer has that pesky car payment to deal with. This is great! He tells himself that he works hard for his money, and he deserves to drive a better car. So he trades in his current car (not worth that much any more after the effects of depreciation) and uses that as a deposit. In a mad stroke of luck and coincidence, Peter finds another car which requires exactly another R100k finance deal over 5 years at 12%.

The finance deal runs it’s course, and again, after the 5 years are up, Peter has paid another 1/3 of a car over to his bank in the form of interest. In total, Peter has now bought his bank 2/3 of a car. At this point he has also progressed further up the corporate ladder, earns slightly more, and now of course “deserves” an even better car…

I think you can see the pattern here. After the third iteration of this pretty “normal” behaviour, Peter would have bought his bank a full car. Why thanks Peter, your bank loves you too!